Islamic Banking

download Islamic Banking

If you can't read please download the document

  • date post

    28-Nov-2014
  • Category

    Documents

  • view

    5
  • download

    0

Embed Size (px)

Transcript of Islamic Banking

ISLAMIC BANKING

WHY ISLAMIC BANKING? HISTORY IN PAKISTAN SERVICES OF IBs

ISLAM A COMPLETE RELIGIONvTeachings about all spheres of life . vRules of ISLAM are also in favor of humanity in this world as well . vSources of Shariah : 1 . Quran 2 . Sunnah 3 . Ijma 4 . Ijtehad / Qiyaas

RULES OF ISLA M CONCERNED WITH OUR ECONOM IC LIFEIt would be very difficult to collect and mention all of them in this brief article . However , some of the basic rules would be worth mentioning . These are : vRiba vGharar

RIBARiba ( Interest ) is a loan with the condition that the borrower will return to the lender more than and better than the quantity borrowed .

Riba is strictly prohibited in Islam . It has two types : 1 . Riba - Al - Dain 2 . Riba - Al - Fadhl

R IBA - AL - DAI NAny excess benefit required or given as the case maybe as consideration in a loan transaction . Due to the prohibition of Riba Al Dain , all of the following types of transactions are not allowed : vInterest - based loans . vDiscounting of receivables . vTrade of debts with profit . vTrade of all interest - based securities .

RIBA - AL - F ADHLAny excess in spot or deferred barter trade of some specific homogeneous commodities ( such as gold , silver , all weighable / measurable things like wheat , petrol or commodities that are used as a medium of exchange like currencies ). Due to the prohibition of this type of Riba , the following transactions are not allowed : vSpot or credit sale of gold with gold in excess . vExchange of currencies of same country in excess , etc .

GhararLiteral meaning of Gharar is the sale of probable items whose existence or characteristics are not certain , due to the risky nature that makes the trade similar to gambling .

vSelling the birds in the sky . vThe fish in the water , etc .

GHARAR PROHIBITED TRANSACTIONSvUncertainty or ambiguity in the transaction . such as the purchase of premiums to vInsurance

insure against v

something that may or may notoccur .

vFuture or forward transaction in which Salev

contract is contingent to a future period , performance of which is uncertain as it is not executed now .

vDerivatives used to hedge against possibleoutcomes . v

Introduction in Pakistan( Cont )vISLAM was the basis of creation of an independent state within the Sub - Continent . vQuaid - e - Azam , in his speech at the occasion of the inauguration of State Bank of Pakistan , had expressed the desire for evolving an Islamic system of banking . vArticle 38 ( f ) of the Constitution of the Islamic Republic of Pakistan provides : The State shall . eliminate Riba as early as possible .

Introduction in Pakistan( Cont )

1960 s

vEfforts to Islamize the economy of Pakistan started . vA bold and comprehensive exercise . vNon - interest based banking was rolled out country - wide . vThe whole exercise was challenged in the Federal Shariat Court . vLater , the decision regarding transformation of the system was set aside in a review petition by the Supreme Court and has been sent to the Federal Shariat Court to start fresh hearings .

Introduction in Pakistan( Cont )

1980 s

vThe efforts and practical steps undertaken in the 1980 s to Islamize the economy at national level are considered as pioneering work in the Muslim world as this became important reference material for other countries which undertook the path towards introduction and establishment of Islamic banking systems . vModel was failed due to : 1 . Recognizes as evolutionary process . 2 . Inflexible for the dynamic market . 3 . No appropriate mechanism to ensure Shariah Compliance . 4 . Stakeholders were not in the favor of this system .

Introduction in Pakistan

2000 s

vThe Chief Executive , in his meeting of 4th September , 2001 , had asked the State Bank to take a lead to establish a full - fledged Islamic bank and allow existing banks to open subsidiaries and separate branches for Islamic banking , instead of a full scale conversion of the financial system . vA separate Islamic Banking Department was established . vAt end of the year 2003 only one bank operated as a full - fledged Islamic bank and three conventional banks were operating Islamic banking branches . Today there are 6 full fledge licensed Islamic banks ( IBs ) and 12 conventional banks have licenses to operate dedicated Islamic banking branches ( IBBs ).

ISLAMIC BANKS IN PAKISTAN

6 Full Fledged Banks

1. 2. 3. 4. 5. 6.

AlBaraka Islamic Bank Bank Islami Pakistan Limited Dawood Islamic Bank Limited Dubai Islamic Bank Pakistan Limited Emirates Global Islamic Bank Limited Meezan Bank Limited ( Cont )

v

ISLAMIC BANKS IN PAKISTAN12 Conventional Banks Offering Islamic Banking 1 ) Askari Bank Limited2 ) Bank Al Habeeb Limited 3 ) Bank Alfalah Limited 4 ) Habib Bank Limited 5 ) Habib Metropolitan Limited 6 ) MCB Bank Limited 7 ) National Bank of Pakistan 8 ) Soneri Bank Limited 9 ) Standard Chartered Limited ( Pakistan ) 1 0 ) The Bank of Khyber 1 1 ) The Royal Bank of Scotland 1 2 ) United Bank Limited 13)

SEGMENTS COVERED BY ISLAMIC BANKS INCLUDEv vCorporate / Commercial . vAgriculture . vConsumer . vCommodity financing . vSME sector . vTreasury and Financial institutions .

ISLAMIC BANKING PRODUCTS & SERVICESvAsset Side

Corporate / Commercial Agricultural Consumer Commodity Financing SME Sector Investment Sector

vLiability Side

Current Accounts Basic Banking Accounts Saving Accounts Term Deposits Certificates of Investment

ISLAMIC BANKING PRODUCTS & SERVICESvOthers

Bonds & Guarantees Letters of Credit Remittances ( local & International ) Online banking ATM / debit card ( including Visa ) Safe deposit lockers Utility bill payments etc .

/

Collection of export bills , assignment of export local bills Inter - Bank funds transfer facility through ATM E - Statement facility Lockers Phone Banking and 24 / 7 Call Centre service . Deposit accepting ATMs

COMPONENTS OF ISLAMIC BANKINGv v vLoans vDeposits vOther Services

MODES OF FINANCING

IJARAHis a form of leasing . It involves a contract where the bank buys and then leases an item to a customer for a specified rental over a specific period . The duration of the lease , as well as the basis for rental , are set and agreed in advance .

Ijarah

IJARAHvUsed for long term financing . vOWNERSHIP remains with the bank . vPOSSESION remains with the customer . vTYPE OF ASSET is durable . vINSURANCE OF THE ASSET is the responsibilityof bank .

vPREDETERMINED RENTAL PAYMENTS . vTERMINATION OF IJARAH is with mutual consent .

TYPES OF IJARAHvIJARAH SALAM

This type of Ijarah does not conclude in the transfer of ownership of the leased assets to the lessee .

vIJARAH WA IQTINA

In ijarah wa iqtinaeither party can make a promise to buy / sell the assets upon expiry of the term of lease . Alternatively , the leaser may make a promise to gift the asset to the lessee upon termination of the lease , provided the lessee has fulfilled all his obligations .

MURABAHAmeans a sale of goods by a bank to its customer under an arrangement whereby the seller ( bank ) is obliged to disclose the cost of goods sold and a margin of profit included in the sale price of goods agreed to be sold . Payment can be made either on deferred payment basis or installment basis .

Murabaha

( Cont )

MURABAHABank = seller TYPES OF ASSET

Customer = buyer

Murabaha may be transacted in both tangible and intangible assets . Murabaha shall not be transacted in respect of any debt instrument including receivables INVOICE OF ASSETS The invoice issued by the supplier will be in the name of the financier as the commodity would be purchased by an agent on behalf of such financier . SECURITY / COLLATERAL The buyer i . e . the customer may be required to furnish security in the form of pledge , hypothecation , lien , mortgage or any other form of encumbrance on asset . However , the mortgagee or the charge - holder shall not derive any financial benefit from such security .

MUSAWAMAHvIt works exactly like murabaha with only one difference in respect of pricing formula . v vUnlike Murabaha , seller ( bank ) in Musawamah is not obliged to reveal his cost . All other conditions relevant to Murabaha are valid for Musawamah as well . v vMusawamah can be used where the seller ( bank ) is not in a position to ascertain precisely the costs of commodities that it is offering to sell . v

TAWARRUQ

Literally means

to liquidate .

Tawarruq is an arrangement in which bank sells a commodity to the client on deferred payment at cost plus profit . The client then sells the commodity to a third party on cash with a purpose of having access to liquidity . Therefore at the end of the transaction , the client ends up with liquidities and a debt against the bank which

TAWARRUQ

SALAMIntroduction Salam is a sale

whereby the seller ( customer ) undertakes to supply some specific goods to the buyer ( bank ) at a future date in exchange of an advanced price fully paid at spot . Here the price is cash , but the supply of the purchased goods is deferred .

SALAM .

RABB - US - SALAM MUSLAM ILAIH RA S - UL - MAL MUSLAM FIH

The buyer ( bank ) is called RABB - US The seller ( customer ) is called The cash price is called RA S - UL The purchased commodity is termed as

MUSLAM ILAIH .

MAL .

MUSLAMFIH .

SALAM OVERVIEW

SALAM

back - to - back contract , namely Parallel Salam , to sell a commodity with the same specification as the purchased c